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New Scheme of Control Agreements reached with the two power companies (With video)
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    The Government entered into the post-2008 "Scheme of Control Agreements" with the two power companies today (January 7).

     "The key terms of the new agreements fully meet the public expectation expressed during the two rounds of consultation in 2005 and 2006 respectively, and fully reflect the Government's policy objectives of 'reducing tariffs and emissions; and paving the way for an open market'," Secretary for the Environment, Mr Edward Yau, said.

     He said reducing the rate of return of the two power companies to below 10% would bring a material reduction in tariffs and ease the public's spending on electricity bills.  Emission reduction would also be achieved through linking the rate of return of the two power companies to their environmental performance so as to ensure that there would be sufficient incentives as well as deterrents for their continued efforts to reduce the emission of pollutants and to improve air quality.  As for an open market, the agreements would enable early preparation for the introduction of competition into the market when the time is ripe.

     Under the new agreements, the permitted rate of return of the two power companies will be reduced from the existing 13.5%-15% to 9.99%.  Customers of CLP and HEC can start to enjoy reductions in basic tariffs from October 1, 2008, and January 1, 2009, respectively.  Based on the available 2006 figures, the extent of the reduction in basic tariffs (excluding fuel cost adjustments) should reach double digits. The actual reduction will depend on the balance of the Average Net Fixed Assets of the two companies and their operating costs upon the commencement of the new agreements.  

     "Based on the balance of the Average Net Fixed Assets of the two power companies for 2006, the total reduction in electricity payments for residential and commercial customers can amount to $5 billion annually," said Mr Yau.

     On emission reduction, under the new agreements, if the power companies exceed the emission cap for any of the pollutants specified in their Specified Process Licences by the Environmental Protection Department, their rate of return will be reduced by 0.2 to 0.4 percentage point depending on their actual emission levels.  Based on their balances of Average Net Fixed Assets in 2006, the maximum penalty amounted to $200 million to $300 million.  As a corollary, if their emission in all the pollutants is below the specified caps, the companies will be entitled to an award of 0.05 to 0.1 percentage point in permitted return as an incentive.  

     "The incentive and penalty arrangements aim to encourage the power companies to take proactive steps to reduce emissions and sustain strict compliance with environmental requirements.  This also strikes a balance between the environmental obligations of the power companies towards our air quality as well as providing them with a stable operating environment," explained Mr Yau.

     On the preparation for an open market, the tenure of the new agreements will be reduced from the existing 15 years to 10 years.  The Government will take into account the market readiness for an open market in deciding whether to extend the tenure for another five years.  

     Mr Yau said that to pave the way for possible opening up of the electricity market, the Government would make necessary preparations in the next regulatory period, including studies on open market models and the regulatory framework, as well as enhanced interconnection between the grids of the two power companies.

     The SAR Government places the environment high on its policy agenda.  As a result, the new agreements have put in place provisions to support the power companies to implement more environmentally friendly measures.  For example, the power companies will enjoy a higher (11%) rate of return for their investment in renewable energy (RE) facilities.  They will also be offered a bonus in the range of 0.01 to 0.05 percentage point in permitted return depending on the extent of RE usage in their electricity generation.  As for energy conservation, the Government will assess the performance of the power companies based on the number of energy audits they perform for customers and the actual energy saved.  A maximum award of 0.02 percentage point in permitted return will be given.  Moreover, the power companies will establish two funds to promote energy efficiency and public education on energy conservation.  The funds will be open to public application.

     "I firmly believe that the new agreements have achieved a reasonable balance.  On the one hand, we have responded to public aspirations for reduced tariffs.  On the other hand, the permitted rate of return under the new agreements will provide sufficient incentive for the power companies to continue investing in electricity supply so as to ensure that the public can enjoy a reliable, safe and efficient electricity supply at reasonable prices.  More importantly, the various environment-related terms, especially those designed to encourage emission reduction and the use of RE, will make a significant contribution to improving air quality," said Mr Yau.

     He thanked all members of the public for their views expressed during the consultation on the scheme of control agreements with the two power companies over the past two years.  He also thanked LegCo members for their views and support.  All these have contributed to the reaching of agreements between the Government and the two power companies.

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Note: The two power companies are CLP Power Hong Kong Limited, ExxonMobil Energy Limited and Castle Peak Power Company Limited (referred to collectively as "CLP" ); and Hongkong Electric Company Limited and Hongkong Electric Holdings Limited (referred to collectively as "HEC").

Ends/Monday, January 7, 2008
Issued at HKT 17:11

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